Many of us don’t love being at our desks every day for eight hours. We dream about having free time to do the things we love. Retiring at 65 just doesn’t seem like a good option for us. We want to be young and fit enough to travel the world, help with community projects and perform charity work.
If you have those dreams, you need to be thinking carefully about your finances and how you can become financially free. This doesn’t mean you won’t work, it will just mean that you won’t have to. You’ll have the capital set aside to take time off, should you wish. But if you do love your work, you can enjoy your work without the stress of financial worries.
US-based financial advisor has what he calls “Seven Baby Steps” which assist people to get themselves out of debt. These steps are also helpful in making the first steps toward becoming financially free. His steps are:
$1 000 in an emergency fund (Or about R10 000.)
An emergency fund is essential for everyone. By putting this amount of cash aside for an emergency or rainy day, you’ll prevent your future self from having to borrow money or put a large payment on a credit card.
Pay off all debt
Ramsey suggests using the “debt snowball” method. This involves paying off your debt with the lowest interest rate first. The theory here is you’ll be so excited by closing that account after making the payment, you’ll be more enthusiastic about paying off your other debt.
Three to six months in savings
This is your real emergency fund. Says Ramsey: “It’s time to build your full emergency fund. Ask yourself, “What would it take for me to live for three to six months if I lost my income?” Your answer to that question is how much you should save.
“Use this money for emergencies only: incidents that would have a major impact on you and your family. Keep these savings in a money market account. Remember, this stash of money is not an investment; it is insurance you’re paying to yourself, a buffer between you and life.”
Invest 15% in your retirement annuity
To maximise your tax advantages, you should pay 15% off your gross income into a retirement annuity every month. This is the minimum you should be saving for your retirement and something you should do without hesitation. Government will give you money back for saving in your retirement annuity. Why would you not want free money from government?
Many people view this step as optional. If you don’t have children, this obviously doesn’t affect you. But if you do have children, you’ll need to weigh up whether your own retirement savings or your children’s college funds are more important to you. Your child can take out a loan to study. You won’t get a loan to fund your retirement.
Pay off your home early
This is your opportunity to pay off your home – the biggest debt of your life. Says Ramsey: “You are getting closer to realizing the dream of a life with no house payments. As you attack this last debt, you will gain momentum much like you did back in the second step of the debt snowball. Remember, having absolutely no payments is totally within your reach!”
Use a bond repayment calculator to work out how much to pay on your bond to get it paid off as quickly as possible and how much you’ll save on interest by doing so.
Save and build wealth
Now that you have no debt, you can concentrate on building your wealth and saving as much as possible toward your retirement.